Edited version of private advice

Authorisation Number: 1052404773006

Date of advice: 28 August 2025

Ruling

Subject: Off market share buyback

Question 1

Is the method employed by Company X in determining the capital component of the purchase price an acceptable methodology for ascertaining the capital/dividend split for the purposes of section 159GZZZP of the Income Tax Assessment Act 1936 (ITAA 1936) for the proposed off market share buyback?

Answer 1

Yes

Question 2

Will the Commissioner make a determination under section 45A of the ITAA 1936 that section 45C of the ITAA 1936 applies in respect of the proposed off market share buyback?

Answer 2

No

Question 3

Will the Commissioner make a determination under section 45B of the ITAA 1936 that section 45C of the ITAA 1936 applies in respect of the proposed off market share buyback?

Answer 3

No

This ruling applies for the following period:

Income year ending DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

Background

Company X carries on a business (the Business). Company X is an Australian resident company with central management and control in Australia. It also carries on the Business in Australia.

Company X was formerly the corporate trustee of a unit trust (the Trust) and the ownership of Company X was related to the ownership of units in the Trust from time to time.

Company X was then removed as corporate trustee and was capitalised by entities related to the unit holders and a third party listed company (Company Y) to acquire the Business.

Off market share buy-back

Company X is proposing to buy-back XXX ordinary shares from shareholders on a pro rata basis for a total share buy-back price of $XXX million (Proposed Buy-back).

The Proposed Buy-back price would be $XXX per share (Buy-back Price) which is calculated based on a valuation of $XXX divided by the number of shares on issue.

The valuation of $XXX was calculated using Company X's actual EBITDA and using a capitalisation rate of XXX%. This follows the methodology used by an independent third party in other similar business acquisitions.

The average capital per share methodology was used to determine the components of the Buy-back Price. The capital component is $XXX per share (being Company X's total ordinary share capital divided by the number of shares on issue) and the balance of $XXX per share is the dividend component.

Company X would be returning capital of $XXX in aggregate and a dividend of $XXX in aggregate.

The primary objective of the Proposed Buy-back is to return surplus share capital to shareholders on a pro rata basis.

Company X has determined that the working capital funded via the share issue at the time it acquired the Business is surplus to current requirements and the surplus can be returned to shareholders. That is, part of the share capital raised at the time Company X acquired the Business is surplus to requirements and this surplus share capital is proposed to be returned to shareholders.

Company X has determined that there is no need for Company X to retain $XXX of share capital, which is a relatively high amount having regard to the industry that Company X operates in. Further, undertaking the Proposed Buy-back would optimise Company X's capital structure by improving the Company's return on equity and debt-to-equity ratios.

The Proposed Buy-back would be undertaken in accordance with the relevant provisions of the Corporations Act 2001 (Cth).

Business acquisition

The acquisition of the Business occurred on DD MM YYYY for $XXX million (Purchase Price). The Purchase Price was agreed by Company Y to be the market value of the Business based on a conservative estimate of working capital required.

It was a condition of Company Y's investment in the Business that the investment be facilitated via the acquisition of an interest in a company rather than a trust. Company Y was an arms' length entity to the owners of units in the Trust and those unit holders effected the capitalisation of Company X and the transfer of the Business to Company X to enable the investment by Company Y.

Capitalisation of company x

The Purchase Price was funded via capital/equity contributions by the shareholders of the Company.

Subscribers in Company X are different legal entities to the unit holders in the Trust. The Subscribers were newly established 'special purpose' entities to house each Subscriber's investment in Company X. There are no common shareholders/unit holders between Company X and the Trust.

Each Subscriber issued one or more promissory notes in favour of Company X to satisfy the total subscription price for their shares in Company X (Promissory Notes). The aggregate amount of the Promissory Notes was equal to the Purchase Price.

The Purchase Price was satisfied by Company X by indorsing all the Promissory Notes in favour of the Trust. No tax roll-over was applied to or used in relation to the Business Acquisition.

Valuation methodology

The valuation methodology adopted by Company Y in determining the market value of the Business was using a capitalisation rate of XXX% and Company X's actual EBITDA. It was a requirement of AUB that a minimum amount of working capital was available within the Business which was factored into the Purchase Price.

The valuation reflects the total enterprise value and already captures the effect of retained earnings through the business's earning capacity.

Promissory notes

No promissory note was forgiven in whole or part and no promissory note is outstanding.

Share acquisition by company y

Company Y's investment in Company X was facilitated by Company Y purchasing XXX ordinary shares for a total purchase price of $XXX from the shareholders.

No new shares in Company X were issued to Company Y.

Dividend policy

Clause XXX of Company X's Shareholders Deed includes Company X's dividend policy

The directors and shareholders of Company X have agreed to not distribute dividends in accordance with clause XXX of the Shareholders Deed for the time being.

The directors and shareholders of Company X have, in principle, agreed to the Proposed Buy-back and the aggregate fully franked dividend of $XXX proposed under the Proposed Buy-back (noting that the Proposed Buy-back will be undertaken in accordance with the relevant provisions of the Corporations Act 2001 (Cth))

Shareholdings

All shareholders in Company X are Australian residents for Australian tax purposes and have not made, and will not make, any distributions to non-resident beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 45A

Income Tax Assessment Act 1936 subsection 45A(3)

Income Tax Assessment Act 1936 subsection 45A(4)

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 subsection 45B(2)

Income Tax Assessment Act 1936 subsection 45B(8)

Income Tax Assessment Act 1936 section 45C

Income Tax Assessment Act 1997 Division 16K

Income Tax Assessment Act 1997 subsection 159GZZZK(1)

Income Tax Assessment Act 1997 paragraph 159GZZZM(a)

Income Tax Assessment Act 1997 section 159GZZZP

Income Tax Assessment Act 1997 subsection 995-1(1)

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Summary

The method employed by Company X in determining the capital component of the purchase price is an acceptable methodology for ascertaining the capital/dividend split for the purposes of section 159GZZZP of the ITAA 1936 for the Proposed Buy-back.

Detailed reasoning

Division 16K of the ITAA 1936 prescribes the income tax consequences of a buy-back of shares for the purchaser and seller.

Subsection 159GZZZK(1) of the ITAA 1936 states:

For the purposes of this Division, where a company buys a share in itself from a shareholder in the company:

(a)          the purchase is a buyback; and

(b)          the shareholder is the seller; and

(c)          if:

                                           (i)                the share is listed for quotation in the official list of a stock exchange in Australia or elsewhere; and

                                          (ii)                the buy-back is made in the ordinary course of trading on that stock exchange;

the buy back is an on market purchase; and

(d)          if the buy-back is not covered by paragraph (c) - the buy-back is an off market purchase.

Accordingly, the Proposed Buy-back is a share buy-back for the purpose of paragraph 159GZZZK(1)(a) of the ITAA 1936.

Furthermore, pursuant to paragraph 159GZZZK(1)(d) of the ITAA 1936 the Proposed Buy-back is an off-market buy-back because none of the shares in Company X are listed on an official list of a stock exchange in Australia or elsewhere.

Relevantly paragraph 159GZZZM(a) of the ITAA 1936 includes the amounts of money the seller has received or is entitled to receive in the 'purchase price' for the purposes of Division 16K of the ITAA 1936. Accordingly, the purchase price for the share buy-back between Company X and its shareholders is $XXX per share.

Subsection 159GZZZP(1) states:

For the purposes of this Act, but subject to subsection (1A), where a buy-back of a share or a non-share equity interest by a company is an off-market purchase, the difference between:

(a)          the purchase price; and

(b)          the part (if any) of the purchase price in respect of the buy-back of the share or non-share equity interest is debited against amounts standing to the credit of:

                                           (i)                the company's share capital account if it is a share that is bought back; or

                                          (ii)                the company's share capital account or non-share capital account if it is a non-share equity interest that is bought back;

is taken to be a dividend paid by the company:

(c)          to the seller as a shareholder in the company; and

(d)          out of profits derived by the company; and

(e)          on the day the buy-back occurs.

Practice Statement Law Administration PS LA 2007/9: Share buy-backs (PS LA 2007/9) provides instruction and practical guidance to staff on the application of various taxation laws in connection with on market and off market buy-backs.

Paragraphs 59 of the PS LA 2007/9 states:

59.          An essential aspect of any off-market share buy-back is the 'split' between the return of capital and the dividend paid to participating shareholders. Section 159GZZZP of the ITAA 1936 prescribes that:

•                    'capital' is debited against company's share capital account; and

•                    the balance of the purchase price is a dividend.

The 'split' is nominated by the company. However, the ATO will have regard to the various anti-avoidance and integrity rules in the provision of written advice to the company.

The split of the purchase price of a share in an off-market buy-back between capital component and dividend component is determined by the company through the way it accounts for the shares bought back. In particular, the capital component of the Purchase Price is the amount that is debited against amounts credited to Company X's share capital account.

However, the Commissioner will have regard to the various anti-avoidance and integrity rules in the provision of written advice to the company in relation to the capital/dividend split of the purchase price in relation to the off-market share buy-back.

This is because a 'split' of the purchase price where the capital component is too low will both stream dividends and artificially increase capital losses to the vendor shareholders. Conversely, a purchase price where the capital component that is too high will provide or stream capital benefits at the expense of dividends to the vendor shareholder. Neither of these outcomes is desirable.

Paragraphs 61 and 62 of the PS LA 2007/9 state:

61.          The ATO considers that there are a number of acceptable methodologies for ascertaining the capital/dividend split, although not all have equal applicability in every case. The following discussion is designed to provide guidance to tax officers in deciding whether to accept the dividend/capital split proposed or to apply one of the various anti-avoidance provisions of the ITAA 1936. All of these methodologies have been accepted by the ATO in cases involving share buy-backs. The question becomes which one is the most appropriate methodology in each case.

62.          One method used to determine the 'split' is for the company to work out its average capital per share (ACPS). This is obtained by dividing a company's ordinary issued capital by the number of shares on issue. The amount so derived is a reasonable estimate of any capital component of the split. The balance of any buy-back price would be a dividend. This method does overcome the dilution issue discussed at paragraph 63 of this practice statement. Another clear advantage is that ACPS gives rise to a strong presumption that sections 45A and 45B of the ITAA 1936 would not apply to the buy-back. Tax officers should examine recent financial year data as well as projected movements in the average. Evidence of recent capital injections just before a share buy-back may attract the anti-avoidance provisions. ACPS should, prima facie, be applied to determine the capital component in an off-market share buy-back. The other methods discussed below may have particular relevance or application in specific instances only.

In the absence of exceptional circumstances, the ACPS method will be applied to determine the capital component.

The primary objective of the Proposed Buy-back is to return surplus share capital to shareholders on a pro rata basis.

Company X has determined that the working capital funded via its share issue at the time of the Business Acquisition is surplus to current requirements and the surplus can be returned to shareholders. That is, part of the share capital raised at the time of the Business Acquisition is surplus and such surplus share capital is proposed to be returned to shareholders.

The Proposed Buy-back is for XXX ordinary shares in Company X from shareholders on a pro rata basis for a total share buy-back price of $XXX. The Buy-back Price would be $XXX per share which is calculated based on a valuation of $XXX divided by the number of shares on issue in Company X.

Company X has applied the ACPS method to determine the components of the Buy-back Price. The capital component of the Buy-back Price is $XXX per share being Company X's total ordinary share capital of $XXX divided by the number of shares on issue in Company X. The balance of $XXX of the Buy-back Price will be treated as a dividend.

Company X would be returning capital of $XXX in aggregate and a dividend of $XXX in aggregate. Company X would fully frank the dividend component and has sufficient franking credits to do so.

For the Proposed Buy-back, Company X has determined its Buy-back Price using the ACPS methodology. Therefore, the method employed by Company X in determining the capital component of the Buy-back Price is an acceptable methodology for ascertaining the capital/dividend split for the purposes of section 159GZZZP of the ITAA 1936 for the Proposed Buy-back.

Question 2

Summary

The Commissioner will not make a determination under section 45A of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45C of the ITAA 1936 applies to deem the capital component of the Proposed Buy-back to be a dividend paid out of profits.

Detailed reasoning

Section 45A of the ITAA 1936 is an anti-avoidance provision which, if it applies, allows the Commissioner to make a determination that section 45C of the ITAA 1936 applies. The effect of such a determination is that all or part of the distribution of capital received by the shareholders under a share buy-back can be treated as an unfranked dividend.

Section 45A of the ITAA 1936 applies in circumstances where capital benefits and payment of dividends are streamed to certain shareholders (the advantaged shareholders) who derive greater benefit from the receipt of share capital, and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or will receive dividends.

The provision of capital benefits is defined in subsection 45A(3) of the ITAA 1936 as:

(a)          the provision to the shareholder of shares in the company

(b)          the distribution to the shareholder of share capital or share premium

(c)           something that is done in relation to a share that has the effect of increasing the value of a share (which may or may not be the same share) held by the shareholder.

The Proposed Buy-back will be a provision of a capital benefit as defined in paragraph 45A(3)(b) of the ITAA 1936 on the basis that the shareholders will receive the capital component as part of the Buy-back Price.

In order for section 45A of the ITAA 1936 to apply to the Proposed Buy-back, the Commissioner must determine that Company X streamed capital benefits to the advantaged shareholders who derived a greater benefit from the capital benefits than the disadvantaged shareholders.

Subsection 45A(4) of the ITAA 1936 identifies a number of circumstances where the advantaged shareholders would derive a greater benefit from the capital benefits than the disadvantaged shareholders, as follows:

(a)          some or all of the shares in the company held by the shareholder were acquired, or are taken to have been acquired, before 20 September 1985

(b)          the shareholder is a non-resident

(c)           the cost base (for the purposes of Part IIIA) of the relevant share is not substantially less than the value of the applicable capital benefit

(d)          the shareholder has a net capital loss for the year of income in which this capital benefit is provided

(e)          the shareholder is a private company who would not have been entitled to a rebate under former section 46F if the shareholder had received the dividend that was paid to the disadvantaged shareholder

(f)            the shareholder has income tax losses

Company X will provide its shareholders with a 'capital benefit' (as defined in paragraph 45A(3)(b) of the ITAA 1936) via the Proposed Buy-back. The shares of all shareholders of Company X will be bought back on a pro rata basis. That is, shareholding percentage of all shareholders will not change after the Proposed Buy-back.

Consequently, there is no 'advantaged shareholder' - no shareholder will receive a 'greater benefit' than other shareholders, for the purposes of section 45A of the ITAA 1936.

Accordingly, subsection 45C(1) of the ITAA 1936 will not apply to deem any part of the capital component of the Proposed Buy-back to be unfranked dividends in the hands of the shareholders. Therefore, the Commissioner will not make a determination under section 45A of the ITAA 1936 that section 45C of the ITAA 1936 applies to deem the whole, or part, of the capital component of the Proposed Buy-back to be a dividend paid out of profits.

Question 3

Summary

The Commissioner will not make a determination under section 45B of the ITAA 1936 that section 45C of the ITAA 1936 applies to deem the capital component of the Proposed Buy-back to be a dividend paid out of profits.

Detailed reasoning

Section 45B of the ITAA 1936 is an anti-avoidance provision which, if it applies, allows the Commissioner to make a determination that section 45C of the ITAA 1936 applies. The effect of such a determination is that all or part of the distribution of capital received by the shareholders under the Proposed Buy-back can be treated as an unfranked dividend.

Section 45B of the ITAA 1936 applies where certain capital payments are paid to shareholders in substitution for dividends. In broad terms, section 45B applies where:

(a)          there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936)

(b)          under the scheme, a taxpayer, who may or may not be the person provided with the capital benefit, obtains a tax benefit (paragraph 45B(2)(b) of the ITAA 1936); and

(c)           having regard to the relevant circumstances of the scheme, it is concluded that the person, or one of the persons, who entered into or carried out the scheme of any part of the scheme did so for the purpose (whether or not the dominant purpose but not including an incidental purpose), of enabling a taxpayer to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936).

The Commissioner considers that the ACPS method gives rise to a strong presumption that sections 45A and 45B of the ITAA 1936 would not apply to the buy-back (see PSLA 2007/9).

Subsection 45B(8) provides the meaning of relevant circumstances of a scheme. The relevant circumstances of a scheme include the following:

(a)          the extent to which the demerger benefit or capital benefit is attributable to capital or the extent to which the demerger benefit or capital benefit is attributable to profits (realised and unrealised) of the company or of an associate (within the meaning in section 318) of the company;

(b)          the pattern of distribution of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company;

(c)           whether the relevant taxpayer has capital losses that, apart from the scheme, would be unutilised (within the meaning of the Income Tax Assessment Act 1997) at the end of the relevant year of income;

(d)          whether some or all of the ownership interests in the company or in an associate (within the meaning in section 318) of the company held by the relevant taxpayer were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985;

(e)          whether the relevant taxpayer is a non-resident;

(f)            whether the cost base (for the purposes of the Income Tax Assessment Act 1997) of the relevant ownership interest is not substantially less than the value of the applicable demerger benefit or capital benefit;

(h)          if the scheme involves the distribution of share capital or share premium - whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium;

(i)            if the scheme involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests:

                            (i)                the period for which the ownership interests are held by the holder of the interests; and

                          (ii)                when the arrangement for the disposal of the ownership interests was entered into;

(j)            for a demerger only:

                            (i)                whether the profits of the demerging entity and demerged entity are attributable to transactions between the entity and an associate (within the meaning in section 318) of the entity; and

                          (ii)                whether the assets of the demerging entity and demerged entity were acquired under transactions between the entity and an associate (within the meaning in section 318) of the entity;

(k)           any of the matters referred to in subsection 177D(2).

Having regard to the relevant circumstances of the Proposed Buy-back, it cannot be concluded that a person would enter into, or carry out, the Proposed Buy-back for a more than incidental purpose of enabling a participating shareholder to obtain a tax benefit. Therefore, section 45B of the ITAA 1936 does not apply to the Proposed Buy-back.

The Commissioner accepts that section 45B of the ITAA 1936 will not apply because:

•                     the shares will be bought back on a pro rata basis. That is, the shareholding percentage of all shareholders will not change after the Proposed Buy-back;

•                     the Proposed Buy-back is being undertaken for the primary purpose of returning surplus share capital to shareholders on a pro rata basis;

•                     the Proposed Buy-back is a genuine capital return to the shareholders;

•                     the market value of each share of Company X has been determined by adopting a valuation methodology used by a third party investor;

•                     average capital per share as per the ATO guidelines in PS LA 2007/9 is $XXX;

•                     the cost base of the shares held by the shareholders is $XXX per share;

•                     the retained earnings are properly available for distribution to the shareholders - retained earnings have not been offset against the negative reserve balance;

•                     the shareholders are Australian residents for tax purposes and have not made, and do not intend to make, any distributions to non-resident beneficiaries;

•                     the only dividend distribution by Company X since the Business Acquisition was $XXX DD MM YYYY;

•                     the directors and shareholders of Company X have, in principle, agreed to the Proposed Buy-back and the aggregate fully franked dividend of $XXX proposed under the Proposed Buy-back; and

•                     the 'scheme' that is relevant for the Proposed Buy-back only begins immediately after the capitalisation of Company X.

Accordingly, section 45B of the ITAA 1936 has no application to the Proposed Buy-back.

Therefore, the Commissioner will not make a determination that section 45C of the ITAA 1936 applies.

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